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EDITOR'S NOTE: This story has been superseded by the Treasury Department's decision on December 18 to NOT grant relief for 2008 required minimum distributions. For more on the decision, read Treasury to Seniors: Drop Dead.
Seniors whose retirement accounts have been battered got half a loaf from Congress this week when lawmakers suspended the rule that requires Americans 70½ and older to withdraw funds from their nest eggs, even if they don't need the money. No payouts will be required from IRAs, 401(k)s or other retirement plans in 2009.
But what about 2008?
That's the other half of the loaf ... and the question on many retirees' lips since the idea of a moratorium was first raised in connection with this year's required distributions.
Kiplinger's advice: Don't give up hope. Although Congress failed to provide 2008 relief, we expect the Treasury Department to grant some kind of relief, probably within the next week or so. So if you haven't taken your 2008 distribution yet, keep procrastinating.
What's at stake?
Proponents of the moratorium say relief is needed because many IRAs and 401(k)s have taken a beating in the stock-market meltdown. U.S. markets have lost more than $8 trillion in value since they peaked in October 2007. The last thing seniors want to do is sell investments that tanked to take a retirement-plan payout that would further deplete their nest egg. The less money in the account when the market recovers, the less chance they have to rebuild their wealth.
The issue is complicated by the mechanics of the payout rules. Required distributions in 2008 are based on the account owner's age and the account balance at the end of 2007.
An 80-year-old, for example, is required to withdraw about 5.4% of his account this year. If he had $1 million in the account at the end of last year, the 2008 payout would be $54,000. But what if market losses have driven the IRA value down to $600,000? He still has to withdraw $54,000, even though that is 9% of the account's current value.
President-elect Barack Obama, among many others, has called on the U.S. Treasury (which oversees the IRS) to use its authority to suspend the rule for 2008.
But anyone hoping for a full waiver will be disappointed. We don't believe the Treasury will go that far.
Instead, Kiplinger expects that account holders will still have to withdraw funds. But if the balance in your account has fallen since the end of 2007, you'll probably be allowed to take the lower balance into account when computing the 2008 distribution. Treasury is still working out the details but is likely to announce the relief soon so that folks can take advantage of it before year-end. In the example above, taking 5.4% from the shrunken, $600,000 balance would reduce the payout to $32,400, leaving the other $21,600 in the IRA tax shelter.
Reducing the payout also reduces the account owner's tax bill for the year. Except in rare cases in which nondeductible contributions have been made to the retirement plan, every dollar withdrawn is taxed in your top tax bracket.
Drag your feet
It's worth waiting for the official word before acting. So you don't have to rush to meet the December 31 deadline (see Hold Off on IRA Distributions). Whatever Treasury decides, be sure to take the minimum required payout for 2008. The penalty for failing to do so is a stiff one: 50% of what you should have taken.
What if you've already taken your 2008 distribution and Treasury changes the rule? It's still unclear whether you will be allowed to put back any excess withdrawals.
POSTED BY: Don (December 30, 2008 01:12 PM)
Regarding non-taxable RMD's for 2009. What if a taxpayer does take a distribution, does that distribution count toward the calculation of taxable SS benefits or is it excluded from the calculation.
POSTED BY: Limoman (January 16, 2009 06:07 PM)
Well, you're not going to like this, but we need all the tax dollars we can get to pay off this Big Bailout Tax Bill and sticking everyone else with (the tab) isn't right..Everyone should pay their share
POSTED BY: M. A. ALI (January 26, 2009 12:09 PM)
What are the tax consequences of not taking a 2009 required minimum distribution? What happens to the federal and state taxes already withheld from the 2009 distribution before the net distributuion for 2009 is given out and how does this affect 2009 income taxes?
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